Good morning, and welcome to the Horace Mann Second Quarter of 2024 Results Conference Call. All participants will be in a listen-only mode for the duration of the call. [Operator Instructions] After today’s presentation, there also be an opportunity to ask questions. [Operator Instructions] Also, please be aware that today's call is being recorded. I would now like to turn the call over to Brendan Dawal, Vice President, Investor Relations. Please go ahead.

Thank you. Welcome to Horace Mann's discussion of our second quarter results. Yesterday, we issued our earnings release, 10-Q, investor supplement and investor presentation. Copies are available on the Investors page on our website. Marita Zuraitis, President and Chief Executive Officer and Bret Conklin, Executive Vice President and Chief Financial Officer will give the formal remarks on today's call. With us for Q&A, we have Matt Sharpe, Steve McAnena, Ryan Greenier and Mark Desrochers. Before turning it over to Marita, I want to note that our presentation today includes forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The company cautions investors that any forward-looking statements include risks and uncertainties and are not guarantees of future performance. These forward-looking statements are based on management's current expectations, and we assume no obligation to update them. Actual results may differ materially due to a variety of factors, which are described in our news release and SEC filings. In our prepared remarks, we use some non-GAAP measures. Reconciliations of these measures to the most comparable GAAP measures are available in our investor supplement. I'll now turn the call over to Marita.

Thanks, Brendan, and good morning, everyone. Yesterday, we reported second quarter core earnings of $0.20 per diluted share, a significant improvement over prior year and in line with our pre announcement. Total revenues were up 9% with net premiums and contract deposits earned up 8%. Our property and casualty profitability restoration strategy remains on track to reach an underwriting profit in 2024 and target profitability in 2025. Our agency force is driving profitable growth in both our retail and worksite divisions. Property and Casualty sales were up 37%, supplemental and group benefit sales were up 20%. These results underscore our confidence in achieving our objective of a double digit shareholder return on equity in 2025. As we noted in our pre announcement, in the first half of 2024, we recorded some mark to market valuation adjustments related to our commercial mortgage loan fund portfolio. The CML portfolio is roughly 9% of our total investments and is held within our life and retirement and supplemental and group benefits portfolios. Bret will give more details, as well as the specific accounting requirements later in the call. First, I want to take a step back to provide some perspective on our year-over-year investment results. In the first half of 2024, total net investment on the managed portfolio rose more than 3% over prior year, despite the returns on commercial mortgage loan funds that were meaningfully below historical averages. The core fixed maturity portfolio is performing very well in the high interest rate environment. At the end of the second quarter, our pre-tax investment yield rose to 4.46% and new money rates exceeded the portfolio book yield by 163 basis points. Even with the revised outlook for commercial mortgage loan funds in 2024, we expect higher total net investment income for the full year…

Thanks, Marita. 2nd quarter core earnings were $8.4 million or $0.20 per diluted share, a significant increase from $0.03 a year ago. Our P&C profitability restoration strategy remains on track to return an underwriting profit in 2024 and reach target profitability in 2025. We're also seeing strong growth momentum across the segments. As we noted in our pre announcement, we now expect a full year core EPS of $2.40 to $2.70 primarily due to lower than anticipated income on our commercial mortgage loan funds as well as first half catastrophes that were above our five-year exposure weighted average. Today, I'll start my remarks with more detail on investments and then speak to the performance of each of the three segments. Within our $7 billion investment portfolio, over 80% of our assets are invested in our fixed income portfolios which have a weighted average credit rating of A plus. These portfolios have clearly benefited from the higher interest rate environment and are performing above our expectations. At the end of the second quarter, our core new money yield was 5.88% well above the core pre-tax yield of 4.25%. The portfolio is concentrated in investment grade corporates, municipals and high quality agency and agency MBS securities. We have $627 million or about 9% of our portfolio in commercial mortgage loan funds. We hold these assets in fund structures across a diverse group of managers to provide access to broader markets, geographies, property types, borrowers and loan types versus the direct loan origination strategy used by many of our life industry peers. We therefore follow the equity method of accounting for these funds. Essentially, we're booking quarterly adjustments based on current real estate property valuations that have a one quarter lag and can be impacted by market factors like interest rates in the…

We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Meyer Shields with KBW. Please go ahead.

Great. Good morning, everyone. I wanted to ask a question based on Brett's comments, because when we look at, I guess, the rate of earned rate increase or the pace of earned rate increase and what seems to be decelerating severity trends, I guess I would have expected the underlying accident year loss ratio in auto to improve by a little bit more than it had. I was hoping you could talk through I think it's the frequency issue that probably opposed that. I was hoping you could add a little detail to what's going on there.

Sure, Meyer. This is Mark. I'll take that question. When we look at auto frequency, the accident frequency in the quarter was a bit elevated compared to 2023. I think it's primarily attributable to the fact that spring break across much of the country was a little bit later this year, so some of what would normally come as accident frequency in the first quarter leaked into the second quarter. I think that's a little bit exacerbated by the fact that we have our educator niche. But if you look at the first half of the year in aggregate, accident frequency is pretty much flat year-over-year. And if we look at severity, the metal coverages are definitely coming down. I think on the bodily injury and side, we continue to see trends in the kind of mid- to high single digits, somewhat a function of continued social inflation. But in the aggregate, auto loss costs for the first half of the year, about 5% over where they were in 2023, which is pretty much dead on to what we expected.

Okay. That's very helpful. I guess a follow-up question on that. I guess the delta between filed rate increases on the liability side and on the metal side or the physical damage side, is that changing as we see the physical damage trends abate?

I think it likely will, Meyer, but right now, I mean most of our rate has been primarily across the board, across all coverages. There are some differences but not material differences as of yet. But I think as we get into next year and we feel strong about our profitability trajectory and you get to more kind of inflationary type rate changes, you'll see it match up, I think, much more closely with the underlying coverage inflation. Certainly, as this year's data gets worked into the pipes, yeah -- go ahead, Meyer.

A timeline of the mark to market accreting back to par, I guess maybe the right way to ask is the duration of the real estate portfolio?

Sure. Meyer, this is Ryan. I think you're asking about the timeline of when we think we're going to see some of that recovery in the unrealized. We put a little more detail in the investor presentation on the commercial mortgage loan portfolio this quarter. It's on Slides 36 and 37. And you can see that about 2 thirds of our CML portfolio will mature over the next 18 months. So as a reminder, with equity method of accounting, we've taken a valuation adjustment real time, one quarter lag to every single loan in that limited mortgage loan fund portfolio, that's 249 of them. And clearly, many of them, the vast majority, continue to perform well. And you can see that in the cash yield statistics that we put out on that slide for you. There's a significant delta between the cash yield and the net investment income, and the net investment income reflects those unrealized adjustments. So with two thirds of them maturing over the next 18 months, we feel good that there's a tailwind there that will play in. Our estimate for second half is conservative. And so I think you're going to see more of that in 2025 or later, but we feel confident about the trajectory.

Fantastic. Thank you so much. And I apologize for my phone.

No problem. Thank you.

And our next question will come from Wilma Burdis with Raymond James. Please go ahead.

Hey, good morning. Could you just talk about the -- can you guys hear me?

Yes.

Could you just talk about the trajectory of the interest rates that are factored into the current CML portfolio valuation? And maybe just talk about the expectation for rate cuts that's baked into that assumption? Thanks.

Sure, Wilma. This is Ryan. Thanks again for the question. Our commercial mortgage loan portfolio is primarily floating rate exposure over 80% of the loans, close to 85% are floating rate. And that has certainly helped cash yields. But the inverse of that is it puts pressure on the valuation, on cap rates of the underlying portfolio, the underlying loans, the properties supporting the loans. As we move into what will likely be a moderating interest rate environment that will be a tailwind for the commercial real estate market. It will provide some relief on the debt service coverage numbers as well as help support cap rates for the underlying properties. So we're not necessarily counting on that. We have a lot of confidence in the underlying fundamentals of the properties. And as I just said to Meyer, we expect a lot of this unrealized marks to come back as they mature, which is over the next -- two thirds of the portfolio matures over the next 18 months.

Okay. Thank you. And then could you talk about what drove the favorable prior year developments? And is that something that we could see continuing into the second half of the year? Thanks.

Sure, Wilma. This is Bret. And as usual, let me just start out by as it relates to the P&C reserves. I think most know that we take a very conservative stance as it relates to our P&C reserving, withholding our reserves at the upper half of the actuarial range. I would also add that we remain very comfortable with our aggregate reserve levels. And to your point, on the PYD that we recorded in the second quarter, obviously, we were encouraged by the emerging favorable trends that we're beginning to see. And I think it was in my prepared remarks in the auto claims development pattern, specifically in the auto physical damage coverage. So with that, let me turn it over to Mark who can kind of talk about the more specifically about the trends that we're seeing.

Absolutely. I mean, all that development essentially came out of essentially collision and auto property damage, which are tailed lines. As those claims are closing, what we're finding is the severity on them has dropped precipitously from where we thought it was at the time when reserves were set. So at that time, we were still dealing with the tail end of mid- to high single digit severity trends. And now as they're settling out, we're seeing trends that are more in the very low single digits and that's really what's driving that prior year development. So we have a very high level of confidence, that we're right on these numbers.

Yeah. And I can't sit here and guarantee what's going to happen in the second half of this year, but I would just say this, if the trends continue to be favorable as Mark just described, it would not surprise me if we would have development. But to say that we will or we won't, I can't do that. But we feel very good about where we're at currently and the trends that we're seeing.

Thank you. And if I could sneak one more end, could you just talk a little bit about share repurchases? They were a bit higher in the quarter. Cats came in line, but just maybe talk about that and what we could see in the second half of the year and maybe even 25% as P&C operations normalized? Thanks.

Yeah, thank you. I'll let Ryan go through the details. But as we always say, share repurchase is just one piece of a very thoughtful capital management strategy. Ryan, you want to take it?

Sure. Thanks for the question, Wilma. As we have a clear line of sight to returning to target profitability in 2025, that translates into about $50 million of excess capital production and that's on top of the interest expense and a pretty compelling dividend. Our capital management priorities are number one, to fund profitable growth number two, to support that dividend. We've got a bit over 4% right now of the dividend yield and we've increased that annually over the past 16 years. Our approach to buybacks has historically been opportunistic and will continue to be. Like I said, we have a clear line of sight to target profitability. We feel confident in our excess capital production capabilities. And we clearly feel shares are undervalued. And through yesterday, on a year to date basis, we bought back 7.7 million at an average price of $33.30. So pretty opportunistic approach to what we feel is an undervalued stock price.

Okay. Thank you.

[Operator Instructions] And with no further questions, this will conclude our question-and-answer session. I'd like to turn the conference back over to Brendan Dawal for any closing remarks.

We'd like to thank you for joining our call today. Please reach out if there are any additional questions and have a great day. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.